Yields on short-term bonds may rise by 15-20 basis points (bps) in the near term, signalling tight liquidity in the market and mirroring global factors, experts said.
The one-year government bond yield surpassed that of the 10-year note on March 8 following higher-than-expected cut-offs at a treasury bill sale, briefly inverting the yield curve for the first time in almost eight years. The Reserve Bank of India sold 364-day notes at a 7.48 percent yield, the highest since October 2018.
The yield on the one-year bond, which trades close to the 364-day treasury bill yield, rose briefly to 7.48 percent earlier in the day, while the 10-year benchmark 7.26 percent bond yield was 7.48 percent. The one-year note last traded above the 10-year bond in May 2015, according to Refinitiv data.
The yield on one-year government bonds may rise further, which will result in yield inversion increasing, experts said. The yield inversion came in the backdrop of US Federal Reserve Chair Jerome Powell signalling a more aggressive interest rate hike scenario in the US.
In line with this, experts indicated that the yield inversion is set to rise as yields on short-term bonds are likely to go up.
“The yields are on the verge of going up. We are expecting the yields on one-year bonds to rise by 15-20 bps immediately and further rise in the next 15-30 days,” said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap, a debt advisory firm.
According to Madan Sabnavis, chief economist at Bank of Baroda, “Short-term yields rise fast while the longer-term ones have been sluggish.”
Economic slowdown?
Experts also said that a rise in yield inversion will likely result in a slowdown, although not immediately.
“Inversion of the yield curve is typical of an economy which is slowing down. While that is not the case here, a slowdown is imminent, as seen by RBI scaling down growth to 6.4 percent for next year from 6.8 percent in fiscal year 2022,” said Sabnavis.
With the aggressive rate hike scenario signalled by Powell, experts said there is a chance that the same would be reflected in India.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said.
Srinivasan said: “If the RBI infuses some liquidity, we may see some ease. But we expect that the central bank is likely to have two more rate hikes.”
“The Fed has hinted at higher rates in the months to come which has affected market sentiment immediately. The market believes that the RBI will also increase rates now,” Sabnavis said.
The RBI’s Monetary Policy Committee hiked the repo rate, at which it lends to banks, by 25 basis points to 6.50 percent on February 8. The apex bank has increased the repo rate by 250 basis points since May 2022, mainly to rein in retail inflation.
After the recent repo rate hike, data from the Ministry of Statistics and Programme Implementation showed that India's headline retail inflation rate jumped to a three-month high of 6.52 percent in January 2023 from December 2022’s one-year low of 5.72 percent.
After being above the upper limit of the RBI’s 2-6 percent target range for the first 10 months of 2022, the latest Consumer Price Index inflation print was significantly above the consensus estimate.
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